Singapore Airlines Ltd (SGX: C6L), or SIA in short, is our country’s flag carrier with brands such as the namesake Singapore Airlines, regional airline Silkair and budget carrier Scoot.
Recently, SIA was named as one of the top 50 genius companies by Time magazine. It is the sole airline and South-east Asian company to feature on the list. According to Time, the companies identified are “inventing the future” and driving progress now.” Time also thinks that these companies are worth watching for what they would do next.
Despite the latest accolade given to SIA, on top of the numerous awards it has won, such as the Skytrax’s Airline of the Year and Fortune magazine’s Top 50 World’s Most Admired Companies, I’m staying away from SIA as an investment.
Commodity-like business with high capital expenditure
In a 2002 interview, Warren Buffett, one of the best investors in the world, said:
“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. The airline business has eaten up capital over the past century like almost no other business”.
Airlines are commodity-like businesses since consumers usually choose an airline based on price. The situation has been made worse in recent history with the proliferation of low-cost carriers.
On top of not having a wide moat, airlines require constant replenishment of assets — which are not surprisingly, planes.
SIA’s aircraft fleet is one of the youngest in the world, with an average age of seven years and seven months, as of October 2017. The constant need for SIA to spend on capital expenditure to keep its fleet of aircraft fresh has resulted in negative free cash flow in recent years. For context, in FY2017/18 (financial year ended 31 March 2018), SIA’s capital expenditure was S$5.2 billion while its cash flow from operations was just S$2.6 billion. These numbers translate to free cash flow of a negative S$2.6 billion. In FY2016/17, SIA’s free cash flow was negative S$1.4 billion.
Free cash flow is cash that a company can use to pay dividends to shareholders, pare down debt, and make acquisitions, among other things.
The Foolish takeaway
SIA’s share price is S$9.19 currently, which is a multi-year low. It also gives SIA a price-to-earnings ratio of 14, and a dividend yield of 4.4%. With a relatively high dividend yield, coupled with the various awards the airline has won, investors could be attracted to SIA.
However, I’m staying away from the company due to the price-competitive nature of its business, and the need for high capital expenditures to keep its aircraft fleet vibrant. With a lack of free cash flow, SIA’s dividend track record also looks shaky.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn't own shares in any companies mentioned.